Sunday, October 11, 2009

Re-Stimulating. Unemployment is bad. More fiscal debt might be worse: At 9.8
percent, the unemployment rate is higher than it has been since it hit 10.1
percent in June 1983. Since the recession began 21 months ago, the economy has
shed nearly 7 million jobs. Whole industries -- cars, housing, finance -- have
been devastated and may never recover fully. Nevertheless, White House
economists reported in September that "employment is estimated to be between
600,000 and 1.1 million higher than it would otherwise have been" because of the
Obama administration's stimulus plan and other government policies, especially
the Fed's monetary expansion. While no one can prove or disprove that -- much
less apportion credit between fiscal and monetary policy -- basic economics
suggests that things might have been even worse if the government had done
nothing...

It does not necessarily follow, however, that the economy needs more stimulus
now. Government has managed to blunt the recession, but at a cost -- a higher
national debt burden, which future Americans must pay off by working harder and
saving more than they otherwise would have...

Ummm...

So far the stimulus spendout has been some $160 billion. The midpoint
estimate by Christy Romer and company is that GDP is now 1% higher than it would
have been otherwise. That higher level of production and employment than we
would have seen otherwise is going to lead to the collection of an extra $80
billion in tax revenues. That means that the net effect of the $160 billion we
have pushed out the door has been to raise the national debt by $80 billion. The
Treasury can now borrow through its TIPS program for 20 years at an interest
rate of 2% plus inflation. That means that taxes in the future have to be higher
by $1.6 billion per year--by $5 per person per year.

Thus the stimulus package so far:

Incur an extra forward-looking tax burden per person of 1.3 cents per
day...

Get an extra 800,000 people productively at work--and get all the stuff
they make and do--this year...

That looks like a very good deal: buying an extra productive job for an
American today at a cost of $2000 per year in higher taxes looking
forward--particularly when you think that some of those extra jobs build up our
productive capacity to make us richer in the future as well.

The stimulus arithmetic suggests we should be doing more of it. The
benefit-cost ratio at current stimulus spending levels is very good...

But nobody on Fred Hiatt's staff realized this. For nobody on Fred Hiatt's
staff thinks that doing any arithmetic is part of their job description. Indeed,
nobody on Fred Hiatt's staff is capable of doing any arithmetic at all.

They blather on:

The real question is whether the benefits of pumping even more government
fuel into America's engine outweigh the risks. We see several reasons to doubt
it. The first is the sheer immensity of stimulus policies already in place.... A
second reason for skepticism is the intellectual poverty of some policy
proposals.... [B]orrowing new money to move demand from the future to the
present -- whether it's demand for houses, cars, or workers -- is a dubious
proposition.

Let's set ourselves a national goal: close down the Washington Post
down by July 2012.

Shaving peaks (e.g. tempering a housing boom so it doesn't crash and burn)
and filling troughs is demand shifting, and that's exactly what you want to do
to stabilize the economy across business cycles. It's a bonus if the extra
spending today gives you higher economic growth in the
future, but that is not necessary for stabilization policy to be successful.

We are constrained in what we can do to stimulate the economy due to the artificial rule
imposed by Republicans that any stimulus spending must increase economic growth
in the future or it is not worth doing. That ties your hands in ways that makes
it harder to implement anything but large scale public infrastructure projects
(roads, bridges, etc.). Nothing wrong with those, they should be part of the mix, but those projects take time to put into place and may not be the best way to give an immediate boost to employment.

Under this definition of what type of stimulus is allowable, hiring someone to pick up trash in a public park is
"wasteful" even though the community might place a high value on such
activities, and it has an immediate impact on employment. I think Brad falls
into the trap of being limited by this constraint in his calculations and discussions which emphasize future
productivity. If you read between the lines he allows for other types of
benefits ("some of those extra jobs build up our productive capacity to make us
richer in the future as well"), but the discussion does seem to be framed within
the "it must help with growth" terms that the right has set down (Republicans will, of course, accept growth enhancing tax cuts as an alternative).

We need to do something about the employment problem, and I don't understand why the left has allowed its hands to be tied
be the GOP's framing of the stimulus issue. Of course it's a political non-starter if you don't fight back and present alternative arguments. There are benefits to stabilizing
the economy by shifting demand from the good times to the bad times even if it
doesn't affect future economic growth (one could even argue that slightly lower
growth is an acceptable trade off for enhanced stability, but that too is a
political non-starter). People need jobs, and we need to put the policies in place - whatever those are - that can provide them.

Update: Dean Baker also weighs in and makes some of the
arguments in the "Bogus Arguments" link above (where he is quoted), along with a few additional points:

More Bad Math/Bad Economics at the Post, by Dean Baker: Given the quality of
the economics reporting, parents would be well-advised to prohibit their
children from reading the Washington Post so that they don't get confused on
basic arithmetic concepts. The Post doesn't want more stimulus and is willing to
say anything to push its case.

The lead editorial
tells readers that: "government has managed to blunt the recession, but at a
cost -- a higher national debt burden, which future Americans must pay off by
working harder and saving more than they otherwise would have." Actually, future
Americans will own the debt that will be paid off. This is not a generational
issue, it can be a distributional one.

There is a point that some of the debt is held by foreigners. This will be a
burden on the country, but the issue here is the trade deficit, not the budget
deficit. If we had no government debt, but foreigners bought up $4 trillion of
private capital in the United States, it would pose the same burden on future
generations as if foreigners bought up $4 trillion of government debt.
Remarkably, the Post is not concerned about the trade deficit and the burden it
poses on future generations and actually does not want the cause of the deficit
-- the over-valued dollar-- to be fixed.

The Post also gives the bizarre argument that we should wait on further
stimulus because "the government still hasn't run through half of the $787
billion in tax cuts and spending increases enacted this year." Of course, for
those of us who passed our third grade arithmetic class this argument is just
plain silly.

The stimulus is already being disbursed at its maximum rate and therefore having
its full impact on the economy. The additional spending will provide no further
boost.

To see this point, imagine my rich uncle promises to give me $2,400 over two
years in installments of $100 a month. I may originally be slow to change my
consumption, but after 3 or 4 months I will likely have fully adjusted my
spending in accordance with this monthly gift of $100. Once I have reached the
8th month, I will almost certainly be at my maximum spending rate, even though
two thirds of the gift is yet to come.

This is where we stand right now. We have spent close to 40 percent of the
stimulus with more than 60 percent yet to come, however the rate of spending
will not be increasing from this point forward. Therefore, it will provide no
further net boost to the economy. People who write editorials for major
newspapers should understand this fact.

It is worth noting that the Congressional Budget Office (CBO) projections
showing a 10.2 percent unemployment rate for 2010 and a 9.1 percent rate for
2011 include the impact of the stimulus. Perhaps the Post's editors know
something that CBO doesn't, in which case they should share this information
with their readers.

Re-Stimulating. Unemployment is bad. More fiscal debt might be worse: At 9.8
percent, the unemployment rate is higher than it has been since it hit 10.1
percent in June 1983. Since the recession began 21 months ago, the economy has
shed nearly 7 million jobs. Whole industries -- cars, housing, finance -- have
been devastated and may never recover fully. Nevertheless, White House
economists reported in September that "employment is estimated to be between
600,000 and 1.1 million higher than it would otherwise have been" because of the
Obama administration's stimulus plan and other government policies, especially
the Fed's monetary expansion. While no one can prove or disprove that -- much
less apportion credit between fiscal and monetary policy -- basic economics
suggests that things might have been even worse if the government had done
nothing...

It does not necessarily follow, however, that the economy needs more stimulus
now. Government has managed to blunt the recession, but at a cost -- a higher
national debt burden, which future Americans must pay off by working harder and
saving more than they otherwise would have...

Ummm...

So far the stimulus spendout has been some $160 billion. The midpoint
estimate by Christy Romer and company is that GDP is now 1% higher than it would
have been otherwise. That higher level of production and employment than we
would have seen otherwise is going to lead to the collection of an extra $80
billion in tax revenues. That means that the net effect of the $160 billion we
have pushed out the door has been to raise the national debt by $80 billion. The
Treasury can now borrow through its TIPS program for 20 years at an interest
rate of 2% plus inflation. That means that taxes in the future have to be higher
by $1.6 billion per year--by $5 per person per year.

Thus the stimulus package so far:

Incur an extra forward-looking tax burden per person of 1.3 cents per
day...

Get an extra 800,000 people productively at work--and get all the stuff
they make and do--this year...

That looks like a very good deal: buying an extra productive job for an
American today at a cost of $2000 per year in higher taxes looking
forward--particularly when you think that some of those extra jobs build up our
productive capacity to make us richer in the future as well.

The stimulus arithmetic suggests we should be doing more of it. The
benefit-cost ratio at current stimulus spending levels is very good...

But nobody on Fred Hiatt's staff realized this. For nobody on Fred Hiatt's
staff thinks that doing any arithmetic is part of their job description. Indeed,
nobody on Fred Hiatt's staff is capable of doing any arithmetic at all.

They blather on:

The real question is whether the benefits of pumping even more government
fuel into America's engine outweigh the risks. We see several reasons to doubt
it. The first is the sheer immensity of stimulus policies already in place.... A
second reason for skepticism is the intellectual poverty of some policy
proposals.... [B]orrowing new money to move demand from the future to the
present -- whether it's demand for houses, cars, or workers -- is a dubious
proposition.

Let's set ourselves a national goal: close down the Washington Post
down by July 2012.

Shaving peaks (e.g. tempering a housing boom so it doesn't crash and burn)
and filling troughs is demand shifting, and that's exactly what you want to do
to stabilize the economy across business cycles. It's a bonus if the extra
spending today gives you higher economic growth in the
future, but that is not necessary for stabilization policy to be successful.

We are constrained in what we can do to stimulate the economy due to the artificial rule
imposed by Republicans that any stimulus spending must increase economic growth
in the future or it is not worth doing. That ties your hands in ways that makes
it harder to implement anything but large scale public infrastructure projects
(roads, bridges, etc.). Nothing wrong with those, they should be part of the mix, but those projects take time to put into place and may not be the best way to give an immediate boost to employment.

Under this definition of what type of stimulus is allowable, hiring someone to pick up trash in a public park is
"wasteful" even though the community might place a high value on such
activities, and it has an immediate impact on employment. I think Brad falls
into the trap of being limited by this constraint in his calculations and discussions which emphasize future
productivity. If you read between the lines he allows for other types of
benefits ("some of those extra jobs build up our productive capacity to make us
richer in the future as well"), but the discussion does seem to be framed within
the "it must help with growth" terms that the right has set down (Republicans will, of course, accept growth enhancing tax cuts as an alternative).

We need to do something about the employment problem, and I don't understand why the left has allowed its hands to be tied
be the GOP's framing of the stimulus issue. Of course it's a political non-starter if you don't fight back and present alternative arguments. There are benefits to stabilizing
the economy by shifting demand from the good times to the bad times even if it
doesn't affect future economic growth (one could even argue that slightly lower
growth is an acceptable trade off for enhanced stability, but that too is a
political non-starter). People need jobs, and we need to put the policies in place - whatever those are - that can provide them.

Update: Dean Baker also weighs in and makes some of the
arguments in the "Bogus Arguments" link above (where he is quoted), along with a few additional points:

More Bad Math/Bad Economics at the Post, by Dean Baker: Given the quality of
the economics reporting, parents would be well-advised to prohibit their
children from reading the Washington Post so that they don't get confused on
basic arithmetic concepts. The Post doesn't want more stimulus and is willing to
say anything to push its case.

The lead editorial
tells readers that: "government has managed to blunt the recession, but at a
cost -- a higher national debt burden, which future Americans must pay off by
working harder and saving more than they otherwise would have." Actually, future
Americans will own the debt that will be paid off. This is not a generational
issue, it can be a distributional one.

There is a point that some of the debt is held by foreigners. This will be a
burden on the country, but the issue here is the trade deficit, not the budget
deficit. If we had no government debt, but foreigners bought up $4 trillion of
private capital in the United States, it would pose the same burden on future
generations as if foreigners bought up $4 trillion of government debt.
Remarkably, the Post is not concerned about the trade deficit and the burden it
poses on future generations and actually does not want the cause of the deficit
-- the over-valued dollar-- to be fixed.

The Post also gives the bizarre argument that we should wait on further
stimulus because "the government still hasn't run through half of the $787
billion in tax cuts and spending increases enacted this year." Of course, for
those of us who passed our third grade arithmetic class this argument is just
plain silly.

The stimulus is already being disbursed at its maximum rate and therefore having
its full impact on the economy. The additional spending will provide no further
boost.

To see this point, imagine my rich uncle promises to give me $2,400 over two
years in installments of $100 a month. I may originally be slow to change my
consumption, but after 3 or 4 months I will likely have fully adjusted my
spending in accordance with this monthly gift of $100. Once I have reached the
8th month, I will almost certainly be at my maximum spending rate, even though
two thirds of the gift is yet to come.

This is where we stand right now. We have spent close to 40 percent of the
stimulus with more than 60 percent yet to come, however the rate of spending
will not be increasing from this point forward. Therefore, it will provide no
further net boost to the economy. People who write editorials for major
newspapers should understand this fact.

It is worth noting that the Congressional Budget Office (CBO) projections
showing a 10.2 percent unemployment rate for 2010 and a 9.1 percent rate for
2011 include the impact of the stimulus. Perhaps the Post's editors know
something that CBO doesn't, in which case they should share this information
with their readers.